Mario Draghi Sends Risk Reeling After Exposing Bitter European Truth

It was shaping up like the perfect overnight ramp following yesterday's Goldilocks election result... and then Mario Draghi opened his mouth.

DRAGHI SAYS DEBT CRISIS STARTING TO HURT GERMAN ECONOMY

DRAGHI SAYS GERMAN RATES LOWER THAN THEY WOULD BE OTHERWISE

DRAGHI: CRISIS MAKING GERMAN INTEREST RATES VERY LOW

DRAGHI SAYS ECB'S OMT IS NOT DISGUISED FINANCING OF GOVERNMENTS - correct: it is quite overt

End result, after surging to nearly 1.29 last night, the EURUSD plunged in minutes, and just hit 1.275, the lowest in over two months. Of course, to our readers, none of this is surprising. Recall this tweet from October 24:

EURUSD has now forgotten Germany is in recession, soars on continued Greek lies

And so finally, after months and months of explaining the fundamental dichotomy in Europe (see here), it is finally becoming transparent. And it is as follow:

Germany, which is the economic dynamo of Europe, needs a weaker EURUSD to keep its export economy running. Period, end of Story. The problem is that the lower the EURUSD, the greater the implied and perceived EUR redenomination risk, which in turns send the periphery reeling, and will force first Spain, and then everyone else to eventually demand (not request) a bailout.Which is just the way Germany likes it, which in turn is as was said here 5 months ago.

Its so BACK....the Greek vote today is up in the air....less revenues..higher expenses....its the new western world economics....and they print to fill the gap....the central bankers are the new player in the house...and they will get more and more powerful as politicians have to bail out all of their buddies...a Faustian deal

This ties in with TD's theory that the EURUSD is used as the big "risk-on"/"risk-off" flag, but it does not tie in with TD's theory that the ECB is keeping the EURUSD high on purpose.

Nope, IMHO it's King Dollar sloshing around to cover all the fires the MegaBanks produced and so getting strenght from "tactical" scarcity, though this is going on since 2009. I don't see the Germans clamoring for a weaker EUR, but I do note several analysts doing exactly this - while noting that it would be an even greater mess. It's the neverending search for the next crash.

Of course it ties with the ECB wanting the EURUSD high (and German industry which just happens to provide all those German jobs, quite rationally, not). As Asmussen and Mario have made it very very clear, the only prerogative for the ECB now is to make redenomination risk (i.e., plunging EURUSD) an irrelevant concern. Which means sending EURUSD higher.

Or perhaps you haven't noticed that the ECB is the only central bank whose "easing" (aka dilution) results in its currency rising? (Ref: see pre-default REITs stock prices surging upon follow on offerings in mid-2009)

Tyler, I disagree. The most hated man in Germany is still Wolfgang Schäuble, followed by HH himself. And the German Industry is not clamoring for a lower EURUSD.

In 2011, Germany exports were around € 1T. The part sent to the US was € 73 bn. Not a strategic reason to ask Draghi for a lower EUR.

If you want to make the argument that German Banks want a lower EURUSD, or that this has something to do with the EuroDollar financing then ok, but not the industry. Except if you want to make the argument around the car industry only. Nevertheless I don't see them having this kind of political leverage.

The whole EURUSD debate sounds for me as if you noting that the moon has some influence on earth. Nevertheless I fear the whole thing is much more complicated by the swaps the damn CBs did, and nearly nobody has any meaningful data on them. But as you noted yourself, deleveraging is going on on both sides of the pond, and I'm willing to believe that this has a much bigger impact than anything else.

But the european industry wants mainly one thing: stabeeleetee. I'd say we'll see, and until then we agree to differ.

The exports outside of the Eurozone are the only ones that matter from a funds flow standpoint. Imports by PIIGS and other Eurozone countries are already funded by Germany directly via TARGET2 (and other various contingent liabilities) which means the European current account transfers are NOT generating incremental inflows into the German economy.

As such, EUR-domestic trade to Germany is absolutely irrelevant. The only trade that matters is that outside of the Eurozone, which in turns needs a weak EUR buffer.

got a bloody nose after your TARGET2 punch. fine, +1. nevertheless if you look at extra-EZ trade, do you look at Germany alone - along your argument of a German Industry lower-EUR lobbying or at the whole eurozone? Germany alone: next partner would be the UK with 63bn. The next partners Russia and China and they pay in a mix of USD (EuroDollars) and EUR.

no, my problem with your argument on lowering the EUR for trade is based on the relative irrelevancy of the trade figures compared to the gigantic proportions of the financial sectors and their huge bets.

To put things in perspective, the BuBa never did things this way and all the other european cbs never did such things when their trade balance was positive. That would be way beyond currency war, that would be trade war. Don't see anybody here willing to contemplate such an escalation.

the financial sector's pre-eminence in this current ponzi is highlighted by the Cyprus and Greek conundrums.

Here are two countries, tiny in size, whose FINANCIAL clout on private banking is huge in EU zone. Why?

Russian Mafia laundering in Cyprus and German cum French bank contagion via Spain/Italy, if Greece bellies up & starts a run.

The sums involved are huge and its all private money laundering in both "mickey mouse" situations on trade/government risk basis for EU.

We are in the hands of a private corporate debt nebulous that nobody understands clearly and whose ramifications scares the shit out of CBs. Project Andromeda....would be appropriate; Draghi's and thus FED's nigthmare.

mhh... I was just going to delete the last comment because I'm still mulling over it's ramifications. Nevertheless, yes, the trade argument is a diversion. No, not that much, as TARGET2 also attests. But yes, the "job" is to keep those bloody industries here. This is the core of the common policies.

Nevertheless my problem is this ECB in the "activist" role portrait. IMHO it's still a fundamentally reactive org, composed of national banks that are, as you say, "scared shitless". And sending the EUR higher would normally entail the expenditure of reserves.

TD's argument on the Risk component is IMO still the most important in the short term, and the swaps situation is anyway quite opaque.

Cyprus? If you ask me it's bogus (don't know, we'll see). A fast one from the Isle of Venus. VVV! I'll go now and get that nose medicated...

How about the bitter truth that $121.2 trillion in US unfunded liabilities are real and will not be cut anytime soon? They will rise by $27.3 trillion in the next four years. That works out to be $230,000 increase per household in the US to $1,249,000. The dollar will slump - buying gold and silver is essential insurance now.

Nobody ever mentions the fact that the Bank of England owns 16% of ECB....the Brits get to print with two presses and have their control of the Eurozone without having the Euro but just the winning side of it that is the profits from the seigniorage.

good point, the import of oil trade leverage pump has a bigger downswing than any export bonus from German durable exports. And its asymmetric as imports affect all not just german economy.

A missing link in this currency war is the yuan USD peg as this would have greater leverage on trade side for Eurozone if it moved up. Keep Euro firm to USd but get Yuan up is what Europe wants on currency side. As does USA...

The above is the depreciation of existing capital assets both of the mechanical and human variety by simply not importing replacements so as to sustain oil imports without any rational national response because the Eurozone is the enemy of the Nation state concept.

On the one hand, all the central bankers claim to fear the spector of deflation (cheaper goods). On the other hand, they all claim that they need their goods to be cheaper to promote exports. What they could just allow the demand curve to accomplish naturally, they fight with nominal manipulation. Only a PHD could think up this nonsense.

Almost all stripes of economic theory these days start with the holy grail of 'growth' - steady state economic theory has never quite caught on. Logically, this means *everybody* has to export more than they import, which is a real cute trick we haven't managed yet. Need more creative bookeeping here - there is a fortune to be made by a clever CPA.

Observing the euro crisis since it began in 2009, one thing has become very clear to me. Any forecast issued by the affected entities is extremely optimistic.

I created the chart above by comparing the EU’s predicted growth rates from its Spring and Fall reports. These reports were issued about six months apart, but look how dramatically different growth rates are. In May the EU predicted a growth rate of 1% for the eurozone, but it revised the forecast downward -1.4 points in today’s report.

Some economists are theorizing that the multiplier effect from reduced economic activity is actually much higher under current economic conditions, and these new numbers tend to support that theory.

The GDP growth rates above are the EU’s own predictions. As such, when we apply the Second Law of the Eurocrisis, we can say with certainty that the numbers will be worse in the end.

The EU predicts that it will stay out of recession, but I do not believe that is likely. Assuming the same amount of bias in the predictions again, 1.4 to the downside, euro zone GDP will decrease by -1.8% in 2013.

When the core countries enter recessionary territory, any of the remaining political support for periphery bailouts will dissipate quickly. To this point, the ECB has been able to hold the eurozone together using monetary policy, but no amount of money printing will be able to stabilize PIIGS debt and the over-leveraged banks once the recession starts.

Good stuff Dare, had to add your blog to the already too-long list. I knew the EU economists were smokin' good stuff - didn't realize how good. Noteworthy is the huge miss on Greece, and they are, as you mentioned, probably still under estimating the crunch.

Could you provide reference(s) to the multiplier effect comment? It makes intuituve sense to me, would be interested in the detailed analysis of why this is probably happening.